Exploration for tight oil in the frontier Santanghu Basin of northwest China has resulted in recent commercial discoveries sourced from the lacustrine Upper Permian Lucaogou Formation, already considered a “world class source rock” in the Junggar Basin to the west. Here we apply an integrated analytical program to carbonate-dominated mudrocks from the Lucaogou Formation in Santanghu Basin to document the nature of organic matter (OM) in the context of an evolving lake system. The organic-rich samples (TOC 2.8–11.4 wt%; n = 10) were widely spaced from an ~ 200 m cored section, interpreted from textural and mineralogical evidence to document transition from a lower under-filled to an overlying balanced-filled lake. Organic matter is dominated by moderate to strongly fluorescent amorphous material with Type I geochemical signature (HI values 510–755; n = 10) occurring in a continuum from lamellar stringers, 10–20 μm thick, some ≥ 1 mm in length (possible microbial mat; preserved only in lower under-filled section) to finely-disseminated amorphous groundmass intimately intermixed with mineral matrix. Biomarkers for methanotrophs and photosynthetic cyanobacteria indicate a complex microbial consortium. A unicellular prasinophyte green alga(?), similar to Tasmanites in marine rocks, is present as discrete flattened discs 50–100 μm in diameter. Type III OM including vitrinite (some fluorescent) and inertinite also is abundant. Solid bitumen, indicating local kerogen conversion, fills voids and occurs throughout the cored section. Vitrinite reflectance values are 0.47–0.58%, consistent with strong OM fluorescence but may be “suppressed”. Other proxies, e.g., biomarker parameters, indicate the Lucaogou Formation is in the early oil window at this location. On average, slightly more amorphous OM and telalginite are present in the lower section, consistent with a shallow, stratified, saline environment with low sediment dilution. More inertinite is present in the upper section, indicating greater terrestrial influx and consistent with higher quartz and plagioclase content (dominantly authigenic chalcedony and albite). Laminated mudstones in the upper section indicate anoxia prevented bioturbation from benthic grazing, also indicating stratified water column conditions. A decrease upsection in authigenic dolomite with reciprocal increase of ankerite/siderite is consistent with decreasing salinity, as is an overall decrease in gammacerane index values. These observations suggest evolution from a shallow, stratified evaporative (saline) setting to a deeper, stratified freshwater basin with higher water input during Lucaogou deposition. The evolution from an under-filled to balance-filled lake in Santanghu Basin is similar to Lucaogou deposition in Junggar Basin, suggesting similar tectonic and climatic controls. Paleoclimate interpretations from other researchers in this area suggested an evolution from semi-arid to humid conditions during the Roadian; we interpret that the evolution from an under-filled to balanced-filled lake seen in our data is in response to climate change, and may represent increased groundwater delivery to the Santanghu Basin.